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go site Is peer-to-peer lending a viable funding source that will work in Australia?

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source site As technology continues to shape the future of the financial services industry, one area that is gaining traction and challenging the traditional banking model is peer-to peer (P2P) lending.

click In a nutshell, P2P lending is where people with money to invest provide loans to those who require funding for specific purposes. Rather than using a bank, the transaction takes place using a web-based platform to link lenders and borrowers, and generally provides a range of services including processing payments, spreading risks between arrangements, checking the financial status of potential borrowers, managing defaults and providing a status on the loans taking place.

follow Martin North, principal of Digital Finance Analytics, says one of the reasons why P2P lending is so attractive to investors is because they may be able to command a higher rate of return compared to standard bank deposits. “Their capital is not protected like when depositing with a bank, so the higher returns reflect the higher risks,” he explains.

follow link “If the borrower defaults, they lose their cash – unless the P2P lender has some type of insurance arrangement.”

Borrowers may also be able to source funds at a cheaper rate, he adds.

Mr North does not see P2P lending as more complicated than traditional lending – just different.

“The P2P lender does not take on credit risk – rather, it creates many-tomany relationships to share the risks between borrowers and investors. As a result, it is not regulated like a bank, and is driven from the point-of-view of a matching service – the better the matching, the lower the defaults,” he says.

According to a Morgan Stanley report on global marketplace lending published in May this year, the total addressable market for P2P lenders in Australia is currently worth $75 billion, and is expected to grow to $87 billion by 2020. Furthermore, the total addressable market for small to medium-sized enterprises (SMEs) equates to $72 billion, with it forecast to grow to $95 billion over the
same period.

While P2P lending is very much in its infancy here in Australia, the model has been relatively successful in other global markets – particularly the US and the UK. Risk and regulation

When it comes to determining risk, P2P lenders use advanced analytics to assess potential borrowers and funders, according to Mr North. He says a lot of the assessment criteria would be familiar to a banker – such as the purpose of the loan and the profile of the borrower – but can become quite sophisticated and in real time, allowing for more instant feedback.

“Typically, a P2P lender will only approve a proportion of the applications – sometimes around 20 per cent – and the risk appetite of potential investors, as indicated by their target investment return for example, will be matched to the relative risk of individual borrowers,” he explains.

“In addition, more recently there has been pooling, meaning risks are shared across pools of investors and borrowers, often underpinned by an insurance guarantee in case of default.”

Here in Australia, P2P lenders have to offer a prospectus to help potential investors navigate through ASIC’s compliance hurdles. As P2P lenders are not considered authorised deposit taking institutions (ADIs), APRA is not involved in the regulation side of things.

According to the product disclosure statement of RateSetter Australia – a P2P platform originating in the UK – it is not a bank, and investment by funders is not considered a deposit. As such, it does not benefit from depositor protection laws as it would if it was an amount deposited with an Australian ADI.

All loans made to borrowers, however, are subject to the provisions of the National Consumer Credit Protection Act 2009 and its related regulation.

Mr North adds that the credit regulation in Australia for SMEs is far looser than for consumers, which is why P2P lending to SMEs is likely to be a focus.

“Consumers are protected by disclosure and cooling-off rules – SMEs are not, and there is no regulation as to interest rates,” he explains.

follow link Local players

Founded in 2011 by Matt Symons and Greg Symons [no relation] and launched in 2012, SocietyOne was
Australia’s first P2P lending platform. After witnessing the success of P2P lending in the UK and the US, both Matt and Greg shared the belief that it would also have the potential to shake up consumer credit in Australia. “We pioneered risk-based pricing by offering borrowers personalised rates based on their credit histories whilst providing qualifying investors with the opportunity to invest in a unique asset class,” says Matt Symons, SocietyOne’s CEO.

Billionaire businessmen James Packer and Rupert Murdoch have thrown their own money behind the company, with SocietyOne announcing in December last year the successful completion of a Series B capital raising, with a consortium of eminent Australian investors made up of Consolidated Press Holdings (CPH), News Corp Australia and Australian Capital Equity.

Speaking on behalf of the consortium at the time of the announcement, Mr Packer said: “We have seen first-hand the power of technology in reshaping the media industry and I am excited about the potential of technology, led by the team at SocietyOne, to help reshape the financial services industry in Australia.

“We see enormous potential in delivering significant savings to borrowers, as well as providing new, innovative products that will also be attractive to the investor market. Peer-to-peer lending is one of the global forces leading the transformation of banking by putting people, not intermediaries, at the centre of the borrowing and lending experience.”

Matt Symons argues that there are several factors setting SocietyOne apart from the rest.

“Firstly, we were the first fully compliant P2P lender to launch in Australia three years ago, and have a significant track record in the market over our competitors scaling the platform and building a well performing loan book,” he says.

“Secondly, we are the only P2P lender in Australia to combine both secured and unsecured asset classes in a single online marketplace.

So with SocietyOne, investors get diversified access across multiple asset classes with more flexibility, choice and control over their investment allocation – they can select portfolios based on their specific risk profile, risk-returns and time-horizon.”

Unlike pooled investment schemes, where investors have very little control over the loans they are exposed to, Mr Symons says SocietyOne provides investors with 100 per cent transparency and the ability to determine their own investments via mandate. Additionally, investors can manage price holdings at their own preferred rates according to risk, with diversification across credit grades and loan asset classes.

ThinCats is another P2P platform that has taken the lending channel by storm.

Based in the UK, ThinCats launched its Australian arm in December 2014 through a joint venture to assist SMEs – roughly 2.8 million of them now – gain access to cost-effective funding.

Sunil Aranha, CEO of ThinCats Australia, says the platform enables SMEs to access growth finance from multiple high-net-worth and wholesale lenders at attractive rates, with loans from two to five years. “The companies that you would usually find on our platform are one of three types: profitable ones that require additional finance for growth and can’t get that extra money from the banks because they don’t have additional real estate security to offer the banks; start-ups with experienced directors; and small businesses whose needs are too small for the bank to assist,” he said.

Mr Aranha says the rate ThinCats’ lenders are seeking is generally between 11 per cent and 19 per cent per annum, “compared to some short-term financiers who charge two per cent to four per cent per month – which annualised can be up to 50 per cent per annum”.

He says the loans provided through the platform are secured by a charge over the business and supported by personal guarantees from all directors.

“Unlike other platforms that offer unsecured loans with more risk, our loans are largely secured with less risk,” he explains.

“In terms of where we are today, we’re not doing small loans – we’re looking at loans around our sweet spot of $250,000, which can take four to six weeks to process. Our model focuses on high- value transactions.”

ThinCats plans to introduce a smaller loan amount for SMEs in 12 months, which Mr Aranha says could be determined sooner using predictive credit scoring and algorithms, all without the need for security.

“All we’ll need is the online support of a personal guarantee. When we do this, brokers can look forward to a mechanism that offers even smaller loans with shorter turnaround times,” he says.

ThinCats is not the only Australian P2P lender to have originated overseas. Licensed under the name of its UK parent, RateSetter Australia was launched in October last year with the support of local and international investors, who injected $3 million into the business, according to Morgan Stanley.

Ratesetter’s point of difference is that it’s currently the only company to provide peer-to-peer lending to retail savers and investors in Australia. “Anyone over the age of 18 in Australia can lend with us,” RateSetter CEO Daniel Foggo says.

“We are the only P2P lender in Australia which is able to accept investment from retail investors.”

This, according to Mr Foggo, allows RateSetter to target SMSF investors, the majority of whom, he says, cannot invest in something that’s for wholesale or sophisticated investors.

“We’ve got an AFS (Australian Financial Services) Licence, so it’s the sort of product their funds are able to invest in.”

Right now around 10 per cent of RateSetter’s lenders are SMSFs but Mr Foggo says he expects this figure to increase dramatically over time.

“We expect that in a few years P2P lending will form a very important component of a typical investment portfolio, especially for SMSFs,” he says. “We can already see this happening in countries that have more established P2P lending operators, like in the UK.”

On the borrowing side RateSetter currently offers only personal loans but this is set to change with the company planning to enter the SME finance market soon.

“In the UK over 10 per cent of our lending is actually to businesses,” Mr Foggo says. “We too expect to diversify over time, our focus at the moment is just personal finance but I think in 2016 you’ll see us moving towards diversifying into other areas.”

However, in this space the company will face some tough competition. In addition to local players, US small-business lending platform OnDeck this year announced a partnership with MYOB and a group of Australian technology investors to expand its operations to our shores.

However, in this space the company will face some tough competition. In addition to local players, US small-business lending platform OnDeck this year announced a partnership with MYOB and a group of Australian technology investors to expand its operations to our shores.

The technology-enabled small business lender provides same-day evaluation, approval and dispersal of funds.

Headquartered in New York City, the company has originated more than US$2 billion in loans to small businesses in more than 700 industries, across all 50 US states and in Canada.

“Australia represents an exciting growth opportunity,” OnDeck CEO Noah Breslow said at the time of the announcement.

“Similar to the US market, in Australia we see a huge gap between small-business financing needs and the availability of capital from traditional sources.

“There is significant unmet mall-business lending demand in Australia, and we believe our online platform is well suited to address the capital needs of Australian small businesses.

florex free Sink or swim?

Morgan Stanley’s report suggests that there is less than $25 million worth of P2P lending in Australia at present – and virtually all of that is consumer lending. However, P2P lending to consumers is expected to explode by 2020, reaching $7.5 billion, while P2P lending to SMEs is forecast to reach $11.4 billion over the same period.

“In our view, SME lending via P2P will grow faster than consumer unsecured lending because access to credit from the banks is more constrained in this segment, and we think SME borrowers are more likely to seek alternative sources of credit,” the report says.

Troy Phillips, director of Sydney brokerage FirstPoint Mortgages, thinks P2P lending could be a genuine threat to the banks’ SME lending sector in just five years.

“If peer-to-peer lenders have a way of sourcing business and funding things such as franchise outlets that are well governed, I think it’s definitely got a way of taking business away from banks,” he says.

“I don’t think banks have been particularly good in small-business lending for many years.”

Mr Phillips believes there will always be a space in the market for P2P lending – but only if there is genuine demand for it and there is evidence real profits can be continually generated from it. “It’s going to be entrepreneurs and investors that build these businesses, so if there’s decent demand for and return from it, I think it will grow,” he says.


Tastylia Online Without Prescription FOCUS: Aussie attraction

Nine reasons why Australia is an attractive market for P2P lenders, and why they could win significant market share from the incumbents:

  • online penetration
  • concentrated banking industry
  • growing margins and high returns in unsecured consumer lending
  • comprehensive credit reporting
  • lack of innovation and generic pricing in personal lending
  • lack of alternative funding sources and high borrowing costs for SMEs
  • alternative asset class in a low rate environment
  • support from the Financial System Inquiry
  • previous success of disruptors in Australian banking.

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